A Research On The Herding Behavior Of Investors And Its Effect In Peer To Peer Lending Market In China

Nowadays, peer to peer lending has developed rapidly in China which has promoted the folk financing and sped up the progress of financial innovation. While, not only does peer to peer lending face challenges of all kinds of risks, but also herding behavior of investors would be formed and have effect on the market. This paper analyzes the mechanism of herding behavior’s formation and its market impacts from a theoretical point of view under the background of introducing related researches. Based on the describe of the current situation of peer to peer lending market as well as features of investors and investors’ behavior, the paper uses data from a domestic typical lending platform as a sample to do some research on herding behavior of investors. Then, the paper builds a Logistic regression model which discusses from the factors of NO.t-1 bidding, borrowing, financial and personal information.The results show that herding behavior exists significantly in our peer to peer lending market. A loan project with higher funded amounts and more bidders is more likely to attract subsequent bids. Investors are more liable to be affected by the existing decision-making information. Besides, the paper finds that investors are more dependent on predecessors’ decisions in the investment environment with greater risks. At this point, investors’ herding behavior would perform more mightily. In addition, current bidding status has a direct positive influence on subsequent bids though, the diminishing marginal information transmitted by herding behavior represents a weaker attraction to investors when it reaches a certain stage. The herding behavior of whole investors shows rational characteristics significantly. However, in high-risk group of investment process, herding behavior has performed irrational features. Rational and irrational herding behavior would make different effects on peer to peer lending market. Moreover, the Matthew effect and adverse selection problem would influence the market further through herding behavior.Based on these results, this paper puts forward some corresponding policy recommendations in hope that relevant departments should take timely and effective measures.In order to avoid a wide range of harms which may be brought by the irrational herding behavior, alleviating the problem of asymmetrical information furthest, improving the mechanism of investor protection, popularizing financial education and strengthening industry self-discipline are indispensable. Thus, peer to peer lending market could develop more regularly.